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Is it true that disbursements from an S Corp must be made equally to all partners of the S Corp?
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In this audio snippet, you'll hear about:
- Yes – but its more of a compensation issue than a distribution issue
Audio Transcript
Travis:
Is it true that disbursements from an S–Corp need to be made equally to all partners of the S–Corp?
Yosef:
Let me ask that question directly.
Travis:
OK.
Yosef:
If the distributions were not being made equally, what would they be?
If you have, let's say, four owners of an S–Corporation, you should own
25 percent of the corporation.
Why
would they not be each getting equal distributions? Generally, the
reason for that would be because some of them are getting management
fees of some sort or bonuses, which would have to then be tied to
compensation. So it's really more compensation in nature than it is
actually distribution.
Travis:
Interesting. You know, I might not be able to remember the exact
situation, but I got a question from one of my listeners that went
along the lines of: "I was partner in an S–Corp with two other people,
and we all received disbursements equally. Until I got out of the
corporation, and then they continued to receive disbursements without
me. And then when tax time came around, it showed unequal disbursements
to all the different partners." And what kind of consequences was he
going to have for that?
Yosef:
The code is actually pretty clear as to what happens when a shareholder
bails out of the corporation in the middle of the year. My hunch is
that if that particular listener were to look back, he'd probably find
that the distributions up until the time that he bailed out of the
corporation were probably equal and pro rata.
Travis:
Right. Yes.
Yosef:
It's quite possible that after that point, of course, because he's no
longer part of that corporation, that he didn't get the same
distributions that everybody else got. And that's why you'd see the
disparity on the tax return at the end of the year.
Travis:
And that's something that is generally accepted by the IRS. It's probably a situation that happens often.
Yosef:
Frequently, sure.
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